1. Indian Education Sector
Long way from graduation!
INDIA RESEARCH
January 2009 Nikhil Vora Shweta Dewan
Class of 20??

2. Sector report
INDIA RESEARCH
16 January 2009
Indian Education
BSE Sensex: 9047
Long way from graduation!
“Over-regulated and under-governed” best describes the largest sector in India –
Education (IES). In a failed public education system, aspirations are meeting affluence
and taking private IES through a phase of Price Discovery. Ironically, the gargantuan
potential (estimated private spend of US$50bn; $80bn by 2012) is trapped! The ‘not-for-
profit’ nature of the $40bn formal IES has deterred for-profit private participation while
inability to transform education into a ‘process-driven’ model curtails scalability in non-
formal IES ($10bn). Our investment thesis in IES rests on 4Cs – players with Credibility
(management intent & ability), Capital (built to last), Creativity (to ‘manage’ the over-
regulated environment) and Content (to differentiate and build annuity). We see limited
value creation potential in the space, mainly due to scale issues. However, Educomp
Solutions and Manipal Universal Learning (unlisted) exhibit the 4KSFs with strong
pricing power as indeed ability to create an annuity pool and are our bets in the sector.
IES – the ‘Largest’…inefficiencies the ‘Highest’: IES is by far the largest capitalized
space in India with $30bn of government spend (3.7% of GDP; at global average), and
a large network of ~1m schools and 18,000 higher education institutes. Yet, the public
education system is ‘insufficient’ and ‘inefficient’, leading education-hungry and affluent
Indians to spend $50bn on private education (14% CAGR over FY08-12E).
Investability Quotient – the ‘Lowest’: The ‘not-for-profit’ diktat, a poor regulatory
framework and low risk-appetite have discouraged for-profit participation in the
lucrative private formal IES. With no structural change in sight (rampant corruption
and low political will), IES has attracted limited capital. Meanwhile, non-formal IES –
while non-regulated and faster-growing – fails the scalability test (barring a few pockets).
Betting on mavericks: Though a few smaller players have attracted some capital, we see
limited value creation potential in IES due to regulatory and scalability issues. Armed
with creativity, certain for-profit players are using innovative two-tier structures to
unlock the ‘surplus’ generated and, more importantly, plough it into scalable (as also
transparent) business models. Exhibiting the 4Cs, we like Educomp Solutions and
Nikhil Vora Manipal Universal Learning (unlisted) -- players with scaled-up and annuity businesses
-
nikhilvora@idfcsski.com as also strong pricing power.
91-22-6638 3308
Shweta Dewan Valuations
shweta.dewan@idfcsski.com FY10E
91-22-6638 3290 Company Price Mkt Cap Reco PER RoCE ROE Target Upside
(Rs) (Rs m) (x) (%) (%) (Rs) (%)
IDFC-SSKI Securities Ltd. Educomp Solutions 1,936 33,389 Outperformer 15.8 28 38.7 2,800 45
Everonn Systems 199 3,008 Neutral 8.4 20.3 16.4 238 19
701-702 Tulsiani Chambers,
NIIT 23 3,755 Neutral 7.2* 9.5 16.7 27 18
7th Floor (East Wing),
Prices as on 15 January 2008; *Valuing NIIT on core earnings ex-share of associate
Nariman Point,
Mumbai 400 021.
Fax: 91-22-2204 0282 “For Private Circulation only” “Important disclosures appear at the back of this report”

3. IDFC - SSKI INDIA
Contents
Investment Argument.........................................................................................4
IES: The ‘largest’… .......................................................................................................... 5
…yet IES a long way from graduation.............................................................................. 8
Low IQ of IES, but we are betting on mavericks............................................................. 13
Preschools: Play time .......................................................................................22
Preschool market: Multifold growth ............................................................................... 22
Organized market: Supply creating demand ................................................................... 24
…but, the business not a child’s play.............................................................................. 26
IQ: High (subject to benign lease rentals) ....................................................................... 28
K12 (schools): A no brainer? not yet! ...............................................................29
K12: The largest in IES .................................................................................................. 29
The ‘big bad’ corporate: Ruled with an iron hand........................................................... 32
Economics in school: Healthy margins ........................................................................... 36
IQ: High........................................................................................................................ 38
Multimedia in K12: Beyond chalk & talk .............................................................39
IQ: High........................................................................................................................ 42
ICT in public K12: Gain but with pain ...........................................................43
IQ: Low ......................................................................................................................... 45
Higher Education: Time to ‘degree shop’? ..........................................................46
Higher Education: Higher private spends ....................................................................... 46
Higher Education: Rules, rules and more rules ............................................................... 49
High hopes from innovative structures ........................................................................... 51
IQ: High (but long-gestation period).............................................................................. 52
Vocational training: New vistas........................................................................54
Vocational training providers: New kids on the block..................................................... 54
IQ: Low (still to scale) .................................................................................................... 58
Coaching classes: Is the ‘coach’ scalable?...................................................................60
The quality conundrum: Genesis of coaching class market.............................................. 60
IQ: Low ......................................................................................................................... 66
Books: Less free play, low growth ....................................................................68
IQ: Low ......................................................................................................................... 70
Companies ...................................................................................................... 72
Educomp ..................................................................................................................................... 73
Everonn ....................................................................................................................................... 91
NIIT .......................................................................................................................................... 103
Manipal Universal Learning (MUL) .......................................................................................... 113
Navneet Publications ................................................................................................................. 120
ETCN (Zee Learn) .................................................................................................................... 123
EuroKids.................................................................................................................................... 126
Kangaroo Kids Education .......................................................................................................... 128
Tree House ................................................................................................................................ 131
Mahesh Tutorials (MT Educare Pvt Ltd) .................................................................................. 133
IMS............................................................................................................................................ 136
Career Launcher ........................................................................................................................ 138
Tutor Vista ................................................................................................................................ 140
VETA ........................................................................................................................................ 142
Liqvid ........................................................................................................................................ 143
Russell Spoken English .............................................................................................................. 144
Shloka Infotech.......................................................................................................................... 145
Hurix ......................................................................................................................................... 147
Excel Soft................................................................................................................................... 148
JANUARY 2009 3

4. IDFC - SSKI INDIA
INVESTMENT ARGUMENT
India’s well-capitalized public education system has failed miserably due to
remarkably high level of inefficiency (37% net enrolment at school level!). This
has led to a whopping $50bn annual spend on private education ($80bn by
2012E). But while money attracts more money, it has ironically eluded IES (just
$180m of private equity capital chase) – a function of limited value creation
potential. We met around 45 players in the space and conclude that IES is a long
way from graduation. While formal IES (80% of total) is lost in a regulatory maze
(not-for-profit mandate), the highly fragmented non-formal segments are in a
scalability bind. With Credibility, Content, Capital and Creativity separating the
ayes from nays, only players working to acquire the 4Cs would show higher
Investability Quotient (IQ). With few ‘relevant’ players above the $20m mark,
Educomp Solutions (FY08 revenues of Rs2861m) and Manipal Universal
Learning (Rs8631m) are the two scaled-up and annuity businesses that we like.
Exhibit 1: Indian Education Sector (IES) – an interesting class
Investability Quotient (IQ) – The
IES – The Largest Inefficiencies – The Highest
Lowest
Largest Capitalized space ‘Insufficient’ funds $40bn:‘overregulated & under-
• Public spend of $30bn (3.7% of GDP) • Free product (public schools) loses governed’
• Private spend of $50bn (14% CAGR market share – 40% of the student • For 80% of the private spends (formal
over FY08-12E) base enrolled in private schools (7% of
IES), regulations (not-for –profit
the total school network)
mandate) a big deterrent
Largest Supply ‘Inefficient’ supply • Low political will to bring about the
• A network of ~1m schools and 18,000 • 66% of the school network only till much required structural change
HEIs primary level
• First Indian satellite - EDUSAT (launch • Only 0.85% of USD 30bn spent on
Sep-04) to serve the education sector capital expenditure
Largest Demand Lowest enrollments, highest dropouts $10bn: Scores low on scalability
• Globally the largest population of • 61% of target population enrolled, 40% • For remaining 20% (non-formal IES),
572m within the 0-24 years age group dropout at school level (a mere 37%
scalability remains a big issue
net enrolled)
• Lowest GER* globally of 9.97 at higher
education level
Players exhibiting the four key success factors (4Cs) - Credibility (management intent & ability), Capital (built to last),
Creativity (to ‘manage’ an over-regulated environment) and Content (ability to differentiate and build annuity) offer
maximum value creation potential
Source: IDFC-SSKI Research; *GER – General enrollment ratio
Exhibit 2: IES – a factsheet
Govt spend (Centre + states) on education: $30bn; at 3.7% of GDP, comparable to global average; 0.82% as capital expenditure, 80% on teachers’
salaries; >90% spend on K12 (kindergarten to 12th grade). Centre’s budgetary allocation up 6x in 11th Plan period
Private spend on education: 5% of average HH income (12% in USA, 15% in China). CAGR of 8.6% vs 3.2% in consumption; 8% CAGR over FY08-20E
(growing fastest globally)
Network: ~1m schools, of which 75,000 (7%) are private – 40% of enrolled population attends private schools; 18,000 HEIs (largest globally)
Regulatory framework: K12 and HEIs required to be run as not-for-profit institutes set up under a Trust/ Society; also, though 100% FDI allowed
through automatic route, no rules/ regulations in place for foreign universities to be recognized under UGC (University Grants Commission)
Source: IDFC- SSKI Research, MHRD
JANUARY 2009 4

5. IDFC - SSKI INDIA
IES: THE ‘LARGEST’…
Largest capitalized space IES is by far the largest capitalized space in India with government spend of $30bn
th
– annual public spend of (2006; at ~3.7% of GDP, it is in line with the global average). For the 11 5-year
$30bn and private spend Plan, the Centre has allocated a 6x higher spend on education. Importantly, the
of $50bn
extent of the spends have created one of the ‘largest’ education networks globally of
~1m schools and 18,000 higher education institutes (HEIs) in India, home to the
largest population within the age group 0-24 years.
Exhibit 3: The ‘inefficient’ equation – ‘Largest’ capitalized = Largest demand = ‘Largest’ supply
IES – Largest capitalized space Government spend as % of GDP – India at the global average
8
Expenditure on Education (in Rs bn)
expenditure on education (as a % of public expenditure)
expenditure on education (as a % of GDP) 6
1500 16%
4
12%
1000
8% 2
500
4% 0
Philipines
Indonesia
Brazil
Chile
Bangladesh
UK
US
Malaysia
Pakistan
India
France
Japan
Germany
0 0%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: (1) GDP figures are taken from National Accounts Statistics Source: UNESCO
(2) Budgeted Expenditure on Education published by D/o Secondary and Higher Education
Exhibit 4: Largest demand ‘Largest’ supply
Total no. of schools
1,025,000
Total no. of students enrolled
=
219m
Total no. of colleges
18,000
Total no. of students enrolled
11m
Source: UN Database Source: MHRD
...yet the system highly The statistics are indeed impressive, but a closer look reveals that these spends are
‘insufficient’ & ‘inefficient’ not only ‘insufficient’ but also ‘inefficient’. Considering global distribution patterns
of public education expenditure (international PPP$) and population, India’s spend
on education is highly disproportionate! While countries in North America and
Western Europe account for more than half of the global spend on public education,
India spends 5.2% of global less than 10% of the world’s school-age population (5-25 years of age; from primary
spends on education…on
20% of world population
to tertiary levels) lives in these countries. USA’s assigned public spend amounts to
25% of the cumulative spend on just 4% of the target population group. In sharp
contrast, India’s public spend on education amounts to ~5.2% of the world’s cumulative
public spend, but the country is home to 20% of the population in the target group.
JANUARY 2009 5

6. IDFC - SSKI INDIA
66% of 1m+ schools only Further, a break-up of government spend shows that only a miniscule 0.82%
till primary level; just 37% component goes towards capital expenditure. A whopping 80% of the revenue
of target population expenditure on teachers’ salaries leaves little to be spent on infrastructure creation,
enrolled
which eventually translates into ‘ineffective’ infrastructure/ quality of education.
While India has a network of more than 1m schools, 66% of these are only till the
primary level. Inefficiency of the public education system is amply captured in the
fact that only 61% of the target group is enrolled in schools and with dropouts as
high as 40%, net enrollment levels are a dismal 37%.
Exhibit 5: IES – an ‘insufficient’ and ‘inefficient’ public education system
Public education expenditure (International PPP$ ) Estimated Average Years of Education of Citizens (LHS)
30 GDP (International PPP$) Population aged 5-25 yrs Public Spending on Education as % of GDP (RHS)
18.0 7.0
20 13.5 5.5
10 9.0 4.0
4.5 2.5
0
China
UK
Germany
Brazil
Italy
France
USA
India
Japan
0.0 1.0
USA UK Canada India China Singapore
Even though India spends 3.5% of GDP ($30bn) on education, While China spends 2.2% of GDP, its estimated average years of
spends are highly disproportionate education of citizens is 10yrs (6 yrs for India)
Source: UNESCO Institute for Statistics database
‘Private’ players – balancing the ‘inefficient’ equation
$50bn private spend – a Given the dismal state that IES (read government-run schools/ institutions) is in,
large opportunity canvas consumers are increasingly veering towards private institutions, typically perceived as
hallmarks of quality (even though quality comes at a price). In this backdrop, the
market for private formal education has grown to a stupendous $40bn in size over
the past few decades. Not only that, a $10bn market has evolved around the formal
education segment.
We have divided the private spend of $50bn (IES opportunity) into two segments: Formal ($40bn) and Non-
Formal ($10bn) IES. Below we give the broad structure followed by formal IES and the key non-formal segments
flanking it.
Formal IES: The formal educational system in India broadly comprises schools (often classified as K12 –
kindergarten to 12th) and higher education (HE) level. All the levels, from school to higher education, fall under
the purview of the Ministry of Human Resource Development (Department of School Education and Literacy &
Department of Higher Education). Schools cater to the ‘3-17 years’ age group. With no central governing body for
K12, they are ruled by state boards/ ICSE/ CBSE/ International Boards. Higher education institutes cater to the
‘18-22 years’ & above age group. With a single governing body (UGC), HE comprises graduate/ diploma/
professional courses. This may be followed by post graduation courses.
Non-formal IES: The non-formal education segments flanking the formal ones include preschools (1.5-3 years),
coaching classes, multimedia/ IT to schools and colleges (catering to both private and public institutions),
vocational training and the books market. The segments are free of any regulations (i.e. no governing/ regulatory
bodies for this segment).
JANUARY 2009 6

7. IDFC - SSKI INDIA
Only 7% of total schools Private institutes in the formal education space (K12 and HE) have proliferated
dispense education to 40% rapidly over the past many decades – and as many as 75,000 schools out of the total
of students enrolled
1m existing schools are privately-run. The importance of private participation is
underlined by the fact that even as only 7% of the total schools are private, they
dispense education to 40% of India’s total students enrolled. This is despite K12
(schools) being a focus area for the government as less than 10% of the total public
expenditure on education is assigned to higher and university education. As a result,
77% of India’s ~18,000 HEIs are private.
Exhibit 6: Private IES – big growing bigger
($ m) Revenues (2008E) % share of total Revenues (2012E) CAGR (%)
Formal IES 40,000 80 65,250 13
K12 20,000 40.00 33,779 14
Higher Education* 20,000 40.00 31,470 12
Non-formal IES 10,110 20.00 19,608 18
Preschool 300 0.60 1,026 36
Multimedia in private schools 70 0.14 459 60
ICT in govt schools 90 0.18 752 70
Coaching classes 6,400 12.77 11,194 15
Vocational training 1,500 2.99 3,662 25
Books 1,750 3.49 2,516 10
Total IES 50,110 84,858 14
Source: IDFC-SSKI Research; *Higher Education spends include $13bn spent annually to export education
Spends on private education to increase to $80bn by 2012E: India’s current
Growing aspirations spend on education is at 5% of average household (HH) income, showing a CAGR
backed with increasing
affluence leading to price
of 8.6% versus consumption growth of 3.2% over 1995-2005. Going forward, we
discovery… expect the consuming class, i.e. HHs with annual income >Rs90,000, to burgeon
from 28% of the total population in 2002 to 48% in 2010. Increasing affluence has
been fostering higher aspirations for India’s populace, and the ability as also
willingness to pay are guiding its education sector through a phase of price discovery.
The $13bn spent annually by Indians on higher education in the overseas markets
asserts the pay power of the education-hungry Indians.
…private IES – a USD80bn With an inefficient public education system, a growing young population, a
opportunity by 2012E bourgeoning middle class (with the intent and ability to spend) and price discovery
that the IES has seen over the past decade, we expect 14% CAGR in private spends
on education ($80bn by 2012). Non-formal segments are fast-growing areas of the
education landscape – we expect 18% CAGR for them over the next few years
against 13% CAGR for the formal education space. (For further details on formal
and non-formal segments of IES, refer to page 20 and 21.)
JANUARY 2009 7

8. IDFC - SSKI INDIA
Exhibit 7: India spends $50bn annually on private education, estimated to grow to $80bn by 2012
Play for private
Total no. of schools 1,025,000
7%
At 75,000,7% of these schools are Private Public
private – yet 40% of the students
are enrolled Total no. of students enrolled 219m
40%
Private Public
Total no. of Higher Education Instututes 18,000
India has 18,000 higher
education institutes – 77% of 77%
them are private
Public
+
Private
Price discovery
1.4 Fees per annum (Rs m) 1999 2008 Fees per annum (Rs)
1999 2008
1.15
44,000
40,000
1.1
CAGR 20%
0.9 33,000
CAGR 12%
0.7
0.6 0.6 22,000
16,000
15,000 CAGR 18%
0.4
11,000
0.2 0.2
0.15 0.15 3,500
0.0 -
IIM A IIM B IIM C IIM K Private Schools Coaching Classes
Household spend on education - CAGR of 8.6% versus consumption growth of 3.2% over 1995-2005
US$50bn expected to grow to US$80bn by 2012 (14%CAGR)
Source: MHRD, IDFC-SSKI Research
…YET IES A LONG WAY FROM GRADUATION
A failed public education system, high socio-aspirational value attached to education
and increasing affordability have all converged to drive demand for quality education
(synonymous with private institutes). The $50bn education market, estimated to
expand to $80bn by 2012, portends a great opportunity at hand for wealth creation.
BUT the ground reality is in stark contrast.
IES – up against scalability While private players have been active in the formal IES for a few decades, the ‘not-
issues and regulations for-profit’ mandate has kept profit-driven corporates away from the $40bn
opportunity. In the $10bn non-formal space, scalability remains an issue in most
pockets. Inability to transform the businesses into a ‘process-driven’ model from
‘people-driven’, as also lumpy nature of revenues, has materially curtailed scalability
in the highly fragmented and largely regional markets. While scale is attainable in a
few pockets, we maintain education is a difficult business to scale – our stand is
vindicated by the dearth of scaled-up players in the space.
JANUARY 2009 8

9. IDFC - SSKI INDIA
Formal IES – regulations a ‘big bully’
‘Not-for-profit’ mandate While India has been proactive on liberalization, IES has remained largely
restrict investments in the
space
untouched by the reforms process. A ‘priority sector’ status does ensure fund flow to
an extent, but the government’s agenda of ‘social inclusion’ has trapped IES in a
regulatory maze. Archaic rules mandate all formal educational institutes in India to
be run as ‘not-for-profit’ centers under a society (registration under the Societies
Registration Act 1860) or a public trust (Registration Act 1908). Any surplus funds
generated in the process of running formal schools/ HEIs have to be ploughed back
into the same school/ HEI and no dividends can be distributed.
Exhibit 8: Formal IES – regulations the big bully
A $40bn market, 12% CAGR till 2012E
K12
Higher Education
50.0%
50.0%
Regulation mandates institutes to be run as ‘not for profit’ trust or society
Source: IDFC-SSKI Research
K12 schools need K12 segment: At $20bn, schools (also popularly known as K12, i.e. from
affiliation/ recognition by Kindergarten to 12th standard) form a core of the total market. A student can
boards for students to be th th
part of education system
continue to be a part of the education system – or his/ her 10 or 12 grade scores
would be recognized – only if he/ she passes out from a K12 institute affiliated to a
board recognized by the system. Hence, all K12 institutes have to be affiliated to an
education board – either central boards like ICSE and CBSE or a state board. While
a few states confer on schools the right to act as profit-generating entities,
educational boards still demand strict adherence to the not-for-profit structure.
Of late, a trend has emerged wherein some schools have been seeking affiliations
with various international boards such as IGCSE (International General Certificate
of Secondary Education) and IB (International Baccalaureate from Geneva); in terms
of operating structure, while these schools can opt for either a not-for-profit trust or
a for-profit company, they can do so only after evaluating the state laws (e.g.
Haryana allows schools to be run for-profit while most states do not).
HEIs (Higher Education Institutes): At $6.5bn ($20bn including cash transactions
of ~$1.5bn and the $13bn spend outside the country), HE is the second largest
opportunity in IES. HEIs seeking recognition by the apex regulatory authority
named UGC (University Grants Commission) also need to be run in the form of a
trust/ society. Technical education institutes find themselves regulated under various
professional councils as well – e.g. AICTE (All India Council for Technical
Education) is the regulating authority for engineering and MBA colleges.
JANUARY 2009 9

10. IDFC - SSKI INDIA
With most of these bodies perceived as extremely corrupt and bureaucratic (a typical
HEIs can opt to not affiliate
to the system; but industry
case of ‘over-regulation but under-governance’), it is difficult for new players to enter
acceptance is mandatory and existing players to expand in the space. However, an HEI (unlike K12) can do
without recognition from these bodies – as long as they are a quality institute with
acceptance from the industry (a student typically joins the industry after passing out from
HEIs). A case in point is ISB (Indian School of Business, Hyderabad – a premiere
business school), which has proved that a quality institute with strong industry acceptance
does not require the stamp of affiliation with these bodies.
Much required structural This implies that 80% (formal IES) of the market potential is not directly exploitable
changes look difficult to by corporates with profit-driven business models. Due to the high involvement of
achieve politicians with respect to ownership and the shortage of quality institutes leading to
lucrative cash transactions, the much-required structural change in education does
not appear to be in sight. Other issues that plague the sector are high land prices and
little clarity on FDI pertaining to this space.
Exhibit 9: Formal IES – structural changes required
What is the issue? What needs to change?
• Regulations require all educational institutions (school • A structural change required to allow for-profit schools
or c ollege) to be run as a trust or a society and colleges.The regulatory bodies need to act as only
‘Trust’ Issues 'quality contr ollers' and check fly-by-night operators
• No div idends can be distributed and the 'reasonable
surplus' needs to be ploughed back into the system
• More than 75% of the educational institutes (in • Strong political will to realign education policies
Political Quagmire Maharashtra) are run by politicians. Low political will to • Vested interests need to take a back-seat
realign the 'not -for-profit' education system
• A large portion of subsidized land demarked for schools • Stat e development authorit ies need t o put a system in
Land Blues is hoarded and resold to sc hools at much higher prices; place to ensure only genuine bidders get land
High land prices make economics unviable
• Even though 100% FDI through the automatic route is • Clear regulations need to be put in place for
Low FDI allowed since 2000, no regulations formulated for recognition of foreign universities
recognizing foreign HEIs under UGC
Source: IDFC-SSKI Research
Non-formal IES – scores low on scalability
Less than 5% of $10bn While we expect the non-regulated $10bn non-formal market to witness 18%
non-formal IES offers CAGR till 2012, the market broadly consists of segments that are inherently difficult
scalability
to scale. In fact, scalability can be achieved only in less than 5% of the market while
three of the largest segments (95% of the opportunity – coaching class; ~64%,
vocational training; 15% and books; 17%) offer limited value creation potential.
JANUARY 2009 10

11. IDFC - SSKI INDIA
Exhibit 10: Non-formal IES – failing the scalability test
A $10bn market, 18% CAGR till 2012E
Multimedia in
Preschool
private schools
Books 3.0%
0.7% ICT in govt
17.3%
schools
0.9%
Vocational
Training
14.8%
Coaching Classes
63.3%
A highly fragmented and largely regional space; ~95% of market inherently difficult to scale
Source: IDFC-SSKI Research
Market remains regional and fragmented…
At 64% of opportunity, India’s non-formal education market is currently dominated by coaching class
coaching classes business (accounting for 64% of the total). However, the business ($6.4bn; 15%
dominate non-formal IES CAGR till 2012E) is inherently regional in nature and person-centric (a people-
driven model), which implies high dependence on a ‘brand-teacher’, or a low degree
of stability and scalability.
High dependency on We believe ~80% of the coaching class market arises from subject/ concept-based
people mars scalability school and tertiary level coaching, which has to be localized to suit the dynamic
within coaching classes…
needs of various institutions and has high dependence on ‘brand teachers’. Mahesh
Tutorials (revenues of Rs700m in FY09E) is one of the few coaching class players
that have managed to achieve some ‘scale’ in this non-scalable segment.
Exhibit 11: Coaching class market (64% of non-formal IES)
Market ($ m) Dependence on people Scalability
6-12 and tertiary education –
subject/ concept-based 5,088 High Low
Grad test prep – based on
concept application 1,078 Medium Low-Medium
Post grad test prep – aptitude-based 216 Low Medium-High
Total Coaching Class Market 6,382 Medium
Source: Coaching class players, IDFC-SSKI Research
…but 20% of coaching Notably, the remaining 20% of the coaching class market has lower dependence on
class market scores people and a larger focus on national level content, making it relatively easier for
medium to high on players to attain scale. Against this backdrop, players in the test prep space – like
scalability
FIIT-JEE (revenues of Rs1.2bn), IMS (Rs1bn), Career Launcher (Rs900m) and
TIME (Rs1bn) – have attained a relatively higher scale.
JANUARY 2009 11

12. IDFC - SSKI INDIA
Hardly any scaled up The vocational training market ($1.5bn, 25% CAGR) accounts for 15% of the non-
players within the formal IES pie. Though the market is continuously evolving with emergence of a
vocational training market host of new avenues beyond IT trainings (financials, retail, aviation, management
certifications and spoken-English trainings), scalability remains low. Given the
dominance of unorganized segment, and inconsistent revenue flows in the corporate
and retail training verticals (trainings is a discretionary spend), there are hardly any
scaled-up/ scalable players.
In the books business ($1.7bn, 9% CAGR), high reusability of books has been
instrumental in capping the growth potential for players.
…scalability only in pockets
Barring a few like Educomp Solutions and NIIT that have acquired the ‘relevant’
scale, the ‘largest’ players across the space are still small. Some scalability has been
seen within the coaching class space focusing on the post-grad test prep space
(medium-high scalability in our view).
Going forward, we expect a few relevant players to be able to create scale and value
within the nascent organized preschool market ($300m; 36% CAGR till 2012E).
Multimedia for private schools, though currently a small market ($70m, ~60%
CAGR till 2012E), offers value creation potential given that it is highly
underpenetrated and a technology-driven model. Educomp Solutions has a lion’s
share (~45%) of the multimedia for private schools market and a distinct first mover
advantage in the space. ICT (Information and Communication Technology – $90m,
~70% CAGR till 2012E), at market penetration of <11% suggests high potential,
but ability to create value is relatively limited in view of L1 bidding followed for
award of contracts.
Exhibit 12: Largest players still small
Preschool
Rs253m Rs240m Rs60m Rs60m
(Private) (Listed) (Private) (Private)
Multimedia/I
T in schools Rs2861m Rs932m
Models that promise scale (Listed) (Listed)
– NIIT and Educomp
Solutions Coaching
Classes Rs1200m Rs1000m Rs1000m Rs900m Rs700m
(Private) (Private) (Private) (Private) (Private)
Vocational
Training Rs10068m Rs1200m Rs995m Rs800m
(Listed) (Private) (Listed) (Private)
Books Market
Rs4111m
(Listed)
Source: Company, IDFC-SSKI Research
JANUARY 2009 12

13. IDFC - SSKI INDIA
LOW IQ OF IES, BUT WE ARE BETTING ON MAVERICKS
$50bn space but only While inefficiencies in the public education system and price discovery have created
$210m of private equity
a substantial opportunity in the private IES space, there is a dearth of players across
till date
segments offering scale. We believe this is the key reason for the sector to have
attracted limited capital chase (private equity of $180m till date).
Notably, there have been no significant investments in the formal education space
(except Manipal Universal Learning). Also, ~20% of the investments in the unlisted
space have been in US-centric e-learning companies which cater to the outsourcing
needs of publishing houses and training needs of companies. Other deals have been
in non-formal areas such as preschools, tutoring, test prep, Multimedia/ ICT and
vocational training.
Exhibit 13: An education ‘Blitzkrieg’ – private equity deals in IES (Jan-06 to date)
PE Firm Target Segment Stake (%) Deal size Period
(US $m)
WestBridge Capital Partners Brainvisa E-learning (US-focus) 5.5 Jan-06
(Now Sequoia Capital)
Sequoia Capital TutorVista online tutoring (US-focus) 2 Jun-06
Lightspeed Venture Partners TutorVista online tutoring (US-focus) 10 Dec-06
& Sequoia Capital
IDFC Private Equity Manipal Universal Higher education 10 31 May-07
Learning
Capital Manipal Universal Higher education 40 May-07
Learning
Manipal Education & Medical Meritrac Corporate recruitment testing 88 18 May-07
Group (HSBC PE Asia)
Helix Investments Mahesh Tutorials Tutorials 30 12 Aug-07
Gaja Capital Career Launcher Test Prep 8.3 Oct-07
Helion Ventures Hurix Systems e-learning (US-focus) 5.1 Oct-07
SAIF Partners ICA Vocational Training Oct-07
Manipal Education Group Tutorvista Online tutoring (increasing India focus) 2.5 Oct-07
SAIF Partners VETA Vocational training, English speaking 10 Dec-07
Aditya Birla Group Core Projects Multimedia ICT 3.5 Jan-08
KPCB, Sherpalo Ventures StudyPlaces Education portal 3 Jan-08
& Infoedge
Capital18, the venture capital 24x7 Learning e-learning - training solutions 4 Oct-08
arm of media group Network18 Solutions Pvt. Ltd
Lightspeed Venture Partners TutorVista Tutoring 18 Jul-08
& Sequoia Capital
Matrix Partenrs India Tree House Preschools 7.5 Aug -08
Total 180 Till date
Source: Websites
While IES exhibits low Investability Quotient (IQ), we have identified four key
attributes (4Cs) that players must possess to acquire scale and create value. Our 4Cs
comprise – Credibility (management intent and ability), Capital (built to last),
Creativity (ability to ‘manage’ the over-regulated environment) and Content (ability
to differentiate and build annuity). In the entire space, we find models of Educomp
Solutions and Manipal Universal Learning exhibiting these key attributes.
JANUARY 2009 13

14. IDFC - SSKI INDIA
4Cs differentiate the ‘men’ from boys
The 4Cs – Credibility, With few scalable players, the lucrative IES market possesses low IQ. We have
Capital, Creativity, Content identified some unique KSFs which, according to us, equip players to attain a higher
IQ; thus, our investment thesis in IES rests on the 4Cs – Credibility (management
intent and ability), Capital (built to last), Creativity (ability to ‘manage’ the over-
regulated environment) and Content (ability to differentiate and build annuity).
MUL and Educomp Based on these criteria, we like Manipal Universal Learning (unlisted) and Educomp
Solution possess the KSFs Solutions (market cap of Rs42.3bn), which have successfully scaled up their business
platforms (Credibility), managed to create a substantial balance sheet size with
financial muscle to fund future growth (Capital), evolved as multi-tiered structures
to ‘manage’ the over-regulated environment (Creativity), and offer a differentiated
product with strong pricing power as also an annuity pool (Content).
Exhibit 14: IQ of MUL and Educomp Solutions
Investability Quotient
Credibility Creativity Capital Content
Management intent & Innovative structure Build to last Differentiate & build
ability annuity
Established credibility A subsidiary Balance sheet size of Creating an annuity pool
Educomp Solutions
Scaled-up operations, (previously EduInfra Rs7.1bn (FY08); - first mover to
investments across the and EduManage) access to Rs7.5bn of implement a product
value chain & tying up
provides land and debt in order to fund called ‘Smart Class’ in
with renowned players
services to own growth over FY09-10 1267 schools ( 3-5 year
like PSBB, DPS and
Raffles schools run under a lock-in), creating an
trust order book of Rs9.8bn
Credibility Capital Content
Management intent & ability Build to last Differentiate & build annuity
Manipa l Universal
Established credibility over Balance sheet size of Rs24.5bn Strong pricing power (a function of
last five decades with world (FY08);
Learning
high quality courses) and students
class institutions like Kasturba Funded by Capital ($40m); IDFC captive for 3-6 years
Medical College Private Equity ($30m)
Source: IDFC-SSKI Research
Credibility – management intent and ability
A management’s ‘intent’ and ‘ability’ to attain scale and create value are the key
factors to determine its IQ in IES. While the success of Educomp Solutions (among
world’s top 15 companies by market capitalization within the education space;
excluding the books market) has lured many a players to join the fray, we believe just
a handful of them has it in them to compete in the long haul.
JANUARY 2009 14

15. IDFC - SSKI INDIA
Exhibit 15: Educomp within the top 15 education companies (by market cap)
Company Country Market Cap ($ m)
Apollo Group US 13,017
Mcgraw-Hill US 7,177
Pearson Plc GB 6,914
Benesse Corp JP 4,496
Devry Inc US 3,824
ITT Educational US 3,714
Strayer Education US 2,969
New Oriental Ch 1,937
Career Education US 1,767
Corinthian College US 1,292
Capella Education US 965
Raffles Education SI 826
Mega Study SK 759
Educomp Solution IN 683
Skillsoft US 668
Source: Bloomberg
Players with established Only a few players have been able to earn credibility in terms of ability to scale.
credibility will score over Players that have managed to do so as also create a BRAND will be at a distinct
younger peers advantage going forward (in education sector, brand creation is a tough and long-
term game – a minimum of three batches, i.e. six years, should pass out and be
successfully placed within the industry before an HEI creates a brand). Thus, we see
incumbent leaders with strong brands in respective segments scoring over peers.
Presence across the value Given that most segments of IES offer limited scalability, some players – to expedite
chain and acquisitions – scale – are increasingly looking to lever their established credibility in one part of the
the way forward
value chain to other areas of the education landscape. For example, preschool
operators like Kidzee, Euro Kids and Kangaroo Kids are levering their brands to
enter into the K12 space, while NIIT is extending its brand in IT trainings to BFSI,
spoken-English and BPO training segments. Coaching class players like IMS are
planning to straddle the HE spectrum (vocational training and HEIs), and Career
Launcher is working on attaining a footprint across the value chain. Going forward,
consolidation (acquisitions) could be adopted as a way to grow faster in existing and
new operations within IES.
JANUARY 2009 15

16. IDFC - SSKI INDIA
Exhibit 16: Players straddling the value chain in quest of scale
K12 Higher Preschools Multimedia ICT in public Coaching Vocational Books Elearning
Education in private schools Classes Training
schools
Career Launcher
Educomp Solutions
Euro Kids
Everonn Systems
Excel soft
Hurix
IMS
Kangaroo Kids
Kid Zee (ETCN)
Mahesh Tutorials
Manipal Universal Learning
Navneet Publications
NIIT Ltd
Shloka Infotech
Tata McGraw
Tutor Vista
Existing Plans
Source: Company, IDFC-SSKI Research
Capital – built to last
With few ‘scaled up’ Education is a capital-intensive business with majority of the formal and non-formal
players, funding key segments requiring heavy upfront investments. Setting up a K12 school entails a cost
challenge in the capital- of ~Rs100m (excluding land cost) while HEIs require much higher investments (a
intensive space
medical college would typically require Rs4bn-5bn). A few businesses in the non-
formal space also call for heavy upfront investments – e.g. upfront capex of
~Rs85,000 per class per school for Multimedia in private schools and Rs250,000-
300,000 per school in the ICT business.
With very few ‘scaled up’ players across the IES and the entire space having seen
private equity funding of only $180m till date, we feel the ability to raise capital is a
critical success factor. Players like Manipal Universal Learning, Educomp Solutions
and NIIT have managed to create a scale built to last.
Creativity – ‘manage’ the over-regulated environment
Creative Kids use two-tier Taking a cue from independent school-owners ‘extracting’ profits from trusts
structures – a for-profit
(schools and HEIs) in the form of lease rentals and management fee, some players
body extracting surplus
from the not-for-profit trust have taken the age-old informal structure to the next level. The nascent corporate
activity in the formal education space is using a two-level structure to circumvent the
‘not-for-profit’ diktat. While multi-layered regulations have meant that 80% of the
opportunity (formal education) remains elusive to commercial activity, ‘innovative’
players like Educomp in K12 space are successfully using these structures to scale up.
A host of other players like Kidzee, Euro Kids, Kangaroo Kids and Career Launcher
are also looking to scale up within the K12 space by using similar structures.
JANUARY 2009 16

17. IDFC - SSKI INDIA
Innovative structures – The ‘innovative structures’ have emerged to break the ‘trust’
issue. The company creates a trust (a not-for-profit body) that runs the educational
institute at one level. It further creates a subsidiary that supplies land, services and
infrastructure to the trust in lieu of rental/ fees. In this way, the entity manages to unlock
the ‘surplus’ and distribute it as dividends or use it to fund other ventures.
Exhibit 17: Creative Kids – innovative structures
Tier 3
Educomp
E ducomp owns Educomp owns
69.4% in Edu Infra 68% in Edu Manage
Edu Infra Edu Manage Tier 2
Management
Lease rentals fees
Trust (non-profit
body generating a
‘reasonable surplus’)
Tier 1
Tuition fees Teachers’
Salaries
For each owned school, Educomp Solutions forms a trust that runs the school’s operations
Educomp has two formed two subsidiaries -
Educomp Infrastructure (69.4% stake with Educomp Solutions) - owns the real estate and
leases it out to the schools
Edu Infra gets: i) Returns of 14.5% on capital employed in setting up schools ii) 4.5% of
annual tuition fee and iii) one-time fee of Rs5m per school
Educomp School Management (68% stake with Educomp Solutions) provides IP/ content and
management services (content, delivery, canteen, transportation, text books etc) to the schools
Source: Company, IDFC-SSKI Research
JANUARY 2009 17

18. IDFC - SSKI INDIA
Clearing the air on ‘Regulatory Ambiguity’
With strong social connotations attached to education, the risk associated with two-tier corporate structures cannot
be completely eliminated. In this direction, we sought views of various industry and legal experts on the survival
quotient of these structures. The key highlights are as follows:
Regulations governing the K12 space: The CBSE/ ICSE and state board regulations stipulate running of a K12
institution ONLY as a trust or society. Income from the trust is non-taxable but the ‘reasonable surplus’ (not
defined) can be used only for development of the same institution and cannot be distributed as dividends.
Regulations governing the Higher & Technical Education space: The rules are more stringent here than for K12 as
an HEI is simultaneously governed by a central body (University Grants Commission – UGC) and a regulatory
body specific to the field of specialization offered by the HEI (e.g. AICTE for engineering and medical colleges).
The UGC stipulates that the Higher and Technical Education institutions be run as a trust or society where all the
infrastructure and capital goods have to be on the books of the university. AICTE further has its own set of rules wrt
infrastructure and curriculum – in case an HEI fails to comply with the same, it is blacklisted (110 universities
blacklisted as on date).
However, taking UGC or AICTE’s approval is the prerogative of a University. For example, ISB and Amity have
been running as not-for-profit structures but without seeking recognition from AICTE.
Regulations governing a corporate entity providing management services and land/ capital goods on lease to a
K12 institution running as a trust: A company set up to offer services and land/ capital on lease can be run as a for-
profit body and does not fall under the purview of the school education boards. The trust will have teachers on the
rolls and collect fees from students while the remaining services are outsourced. This structure has been in existence
for years and has not been challenged. However, it is recommended for the trust and the managing company not to
be run by the same management and common directors, and that the transactions are done at an arm’s length. (The
transactions have to be done at a fair market value, as if the two parties were unrelated.)
Content – ability to differentiate and build annuity
Differentiated product with While education is a difficult business to scale up due to high dependence on people
an annuity model – the and low revenue visibility, scale can be achieved with the ‘right’ content/ offerings.
‘right content’ to scale
Thus, we believe players with the ability to create a differentiated product/ process
with annuity business model can break the scalability barrier.
Manipal Universal Learning has carved a niche for itself within the HE space and
strong pricing power has helped it establish an annuity business model (18,000
students in campus education and 140,000 students in distance education
programmes; students captive for 3-6 years). Educomp Solutions has pioneered a
well-packaged product (Smart Class – a multimedia product to aid teaching in
private schools) in order to tap the paying propensity. A first mover in the space,
Educomp has implemented the product in 1,267 schools with a 3-5 year lock-in
period and acquired strong revenue visibility (order book of Rs9.8bn as of Q2FY09).
JANUARY 2009 18

19. IDFC - SSKI INDIA
Exhibit 18: IES – Report Card
Current Non Value
Growth Scala bility Comment
size Regulated creation
Euro Kids (50% stake acquired by Educomp) and
Preschool
Kangaroo Kids are the relevant players
Innovative structures evolving; Educomp Solutio ns
K-12
and a host of private players looking to acquire scale
Innovative structures evolving; a long term game;
HE
Manipa l Universal Learning the only investable player
Multimedia in private Annuity business model; Educomp So lutions has first
schools mover advantage
ICT in govt schools L1 bidding and a long receivables cycle
Coaching Classes 80% of the market difficult to scale!
Vocational Training NIIT the only scaled-up model
Books Low-growth market (reusability at 70%)
Source: IDFC-SSKI Research
Exhibit 19: Key players – Report Card
Creativity Content Capital Credibility IQ
Educomp Solutions
NIIT
Everonn Systems
Manipal Education
Source: IDFC-SSKI Research
JANUARY 2009 19

20. IDFC - SSKI INDIA
Exhibit 20: Formal IES – a snapshot
Segment Revenues Growth Key risks Key Players Our View
($ m) Drivers
2008E 2012E
K-12 (School) 20,000 34,000 •Largest population •Regulatory overhang- •Millennium A No brainer? Not yet!
globally (and growing) in only a non-profit Schools (part of •Largest potential among the
•Cater to 3-17 the K-12 age group Trust/ Society can Educomp) education space
yrs age group CAGR 14% •Inefficient public school run a school •Kid Zee High (Part
system of ZILS) •While regulations are deterrent to
•Increasing preference for •Rising land prices can •Billabong High most players - innovative
private schools lead to large capital (Part of Kangaroo structures are getting corporatized
•20000-25000 'quality' investment and low Kids) •Healthy margins, an annuity
schools required (NCERT) RoCE •GEMS (Dubai business
•Various states demark based) •Models in the space - Greenfield
land at subsidized rates •Plans to foray - projects/taking over existing
which can be used only IMS, Career schools; joint ventures with
for schools. launcher, Euro Kids developers; providing management
•Potential opportunity - services to existing schools
PPP to manage public
schools
Higher 20,000 31,500 •India is one of the largest •Regulatory overhang - •Manipal Education Time to ‘degree shop’?
Education importers of education UGC (University (Manipal •While regulations are deterrent to
•Cater to ($13bn is spent every year Grants Commission) University, Sikkim most players, innovative structures
>18yrs age outside the country for HE) mandates all HEIs to Manipal University) are getting corporatized to work
group •Demand supply gap - NKC run in the form of a •Amity around the trust regulation
estimates the need for non-profit trust •IIPM
CAGR 12% 1,500 universities •An overregulated •ICFAI
•A low focus area for the space
•Plans to foray – •We feel that entities like Manipal
government •Large political Career Launcher, Education that have already
•Abysmally low GER of involvement IMS established scale and a brand have
9.97 •Very capital intensive a competitive advantage
•Government indications •Time to build brand
of opening up medical equity (minimum of 6
colleges to ‘for profit’ yrs )
entities
Source: IDFC-SSKI Research
JANUARY 2009 20